The largest oilfield services company in the world says that shale drilling activity is slowing, creating an uncertain outlook for 2019.

The recent volatility in oil prices has created “less visibility and more uncertainty” on spending by shale companies in 2019, Schlumberger’s CEO Paal Kibsgaard said on an earnings call on January 18. Shale drillers are “generally taking a more conservative approach to the start of the year, again delaying the broad based recovery in the E&P spend that we expected only three months ago,” he said.

Kibsgaard said that spending from the shale industry could be flat or down this year relative to 2018. That could translate into lower drilling activity, while E&Ps focus on drawing down the enormous backlog of drilled but uncompleted wells (DUCs). Companies working through DUCs could keep production aloft even as drilling slows, but output would likely fall relative to 2018, while decelerating further in 2020.

Schlumberger’s chief executive also warned that the shale industry could see other problems going forward that could be even more significant. Shale drilling suffers from a precipitous decline in output soon after a well is completed. After an initial burst in output, wells see a rapid decline in production. This is not news; it has characterized shale drilling for years.

But this dynamic appears to be a growing problem, one that could soon catch up with the industry. “It is also worth noting that with the continued growth in U.S. shale production, an increasing percentage of the new wells drilled are being consumed to offset the steep decline from the existing production base,” Kibsgaard told shareholders and analysts on Schlumberger’s earnings call. “The third party analysis shows that in 2018, this number was 54% of total CapEx and is expected to increase to 75% in 2021, clearly demonstrating the unavoidable treadmill effect of shale oil production.” Beyond that, well interference is also a mounting problem. Drilling wells too close to one another can cannibalize production, raising costs and leading to less overall output. That becomes a larger problem over time after companies pick over the best acreage. Additionally, the length of laterals and the use of frac sand and other proppants have reached the limits of what they can achieve. “We could be facing a more moderate growth in U.S. shale production in the coming years than what the most optimistic views have been suggesting,” Kibsgaard warned.

That echoes the problems of shale gas giant EQT. The Wall Street Journal reported earlier this month that even as EQT was breaking new frontiers in terms of the length of the shale wells the company was drilling, the economics proved highly disappointing. Last April, one shale gas well EQT drilled exceeded 18,000 feet, (3.4 miles) and EQT thought it could drill horizontal wells approaching 20,000 feet.(3.8 miles) “The decision to drill some of the longest horizontal wells ever in shale rocks turned into a costly misstep costing hundreds of millions of dollars,” the Wall Street Journal reported. EQT’s CEO said later in the year that its wells were encountering problems when they exceeded 15,000 feet.(2.8 miles)

In other words, even as shale oil and gas drillers boast of their ability to achieve ever-increasing gains by drilling longer laterals, using more sand, packing wells into tighter distances – there are signs that these “efficiency gains” are maxing out.

Schlumberger still sees a rebound in drilling over the course of 2019, but in the short run, the fall in oil prices is taking a toll. Baker Hughes reported a massive decline in the active rig count last week, with 21 oil rigs vanishing from American oil fields along with four natural gas rigs. That puts the U.S. oil rig count at its lowest point in eight months. There is typically a lag between major movements in crude prices and a response in the rig count. But a few months on from the collapse of oil prices, we are finally starting to see the effects. Last week’s decline of 21 rigs is the largest one-week drop in nearly three years. “Clearly the slump in the WTI price to $42 per barrel at year’s end made shale oil producers more cautious,” Commerzbank said in a note on Monday.

Looking at the latest oil production forecasts, there is also an expected slowdown in output on the way. The EIA said in its latest Short-Term Energy Outlook that U.S. oil production growth would slow to 1.1 million barrels per day (mb/d) this year, down from a surge of 1.6 mb/d in 2018. By next year, production growth will slow further to a 0.8 mb/d expansion.

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